“Patience is a Virtue”: Tariffs, Investment Risks & Market Volatility in Perspective

A tumultuous turn for US markets in Q1 2025…  
Recent headlines are clearly unwelcome reading for investors worldwide.  Having reached new all-time highs in mid-February, stock markets have seen a swift market correction, with major indices experiencing notable declines and risk levels rising sharply: at time of writing, large cap US stocks have retreated ca. 9%, while global benchmarks have declined roughly 6%. Investors have faced a barrage of alarming news headlines, driven primarily by uncertainty surrounding President Trump's continuously evolving tariff announcements (sometimes changing intraday), the fear of a US government shutdown, and economic uncertainty increasing the risk of US recession. 

Given the speed of the market correction, many professional investors have not been spared; we note that hedge funds have been rapidly reducing leverage (the amount of borrowed money used to take positions in stocks and bonds) in recent weeks and consequently creating further short-term pressure on markets. Current developments are undoubtedly leading to more uncertainty in investment outcomes than in the recent past, further dampening investor sentiment. What should investors make of this? 


… means we need to put the market reaction in context
While headlines can be alarming, it’s important to put current market events into perspective.  We’ve recently come through a period of unusually low market volatility, and it’s important to recognise and easy to forget that market corrections and periods of increased volatility are far from uncommon; throughout history stock market corrections are relatively frequent events. 

It’s also worth noting this decline follows a very strong period for global equities, particularly in the US. Despite the recent correction, currently US equities remain up ca. 19% since the start of 2024 at time of writing. Equity drawdowns of similar magnitude have occurred fairly recently, and markets have since recovered.

In fact, in the last year, we’ve witnessed three corrections of similar magnitude in global equities: 

-    The April 2024 drawdown was a result of escalating geopolitical tensions between Israel and Iran and saw a peak to trough drawdown of ca. 5%.
-    The December 2024 drawdown was due to the Federal Reserve's cautious stance on interest rate cuts, and higher-than-expected inflation data and saw a peak to trough drawdown of similar magnitude.
-    July/August 2024, in fact, saw a larger short-term drawdown (ca. 8.5%) from mid-July to early August, but by the end of August, the market had fully recovered its losses.
 
We also note that the phenomena of “hedge fund deleveraging”, the rapid reduction in positions by hedge funds, has put short-term pressure on the markets due to technical factors rather than fundamental issues that are based on long term economic conditions. This pattern has been observed in previous market cycles where similar selloffs created temporary market disruptions without indicating or triggering deeper financial problems.  While nobody has a “crystal ball”, so far this effect appears consistent to us with previous instances of deleveraging. 


Summarising our current outlook
At atomos, we take a long term, fundamental approach to investment allocation. Below we assess the key current fundamental risks investors face as we see them:

Is a US recession likely? In terms of the likelihood of a US recession, US private sector activity statistics – the labour market, household spending, and business investment – continue to show an economy that is slowing from the strong economic growth rate of last year. However, it is still growing at, or around, its trend rate of 2%. This means that if a US recession does occur, it is much more likely to come from US government policy such as tariffs, immigration and federal layoffs, than US consumers.  We set out our baseline views on the impact of tariffs on the US economy below and the major uncertainties and risks. 

It's useful to think of the ‘normal’ likelihood of a US recession as being around 15%, which is based on the average business cycle being around 6 years. We think the probability is a bit higher than this currently, taking into account the high policy uncertainties, but not alarmingly so. Overall, our view is that recession risk remains relatively low (around 25%) and therefore we believe it is sensible to maintain our current equity and risk allocations within portfolios.
 
How worried should I be about tariffs? The Trump administration plans to announce a comprehensive tariff framework on April 2, including tariffs on imports from China, Canada, Mexico, and various global industries. Coming into this year, we were expecting a 20% tariff on all imports from China, 10-25% tariffs on certain goods from Canada and Mexico not covered by the USMCA (US, Mexico, Canada Agreement), and a global 25% tariff on autos. Following recent developments, we also are accounting for a global 25% tariff on steel and aluminium and expected global 15% tariffs on specific industries like semiconductors, batteries, metals, oil/gas, critical minerals, agriculture, and pharmaceuticals. We also expect global reciprocal tariffs on US exports.

Accounting for these assumptions, our economic outlook for 2025 US growth has fallen slightly to around 2% in 2025, and we expect an increase in core inflation (inflation excluding food and energy) to around 3%. Given this economic backdrop, our central expectation is for the Federal Reserve to cut interest rates twice by 0.25% before the end of 2025. Recognising the highly uncertain nature of future US trade policy, we continue to monitor and assess the tariff rates and associated expected impact on growth and inflation outlook. 

In summary, most of the anticipated tariffs and their impacts have already been incorporated into our forecasts. While the situation remains highly uncertain and evolving, we believe that for the moment these tariffs are unlikely to fully derail the US growth dynamic. 


Beyond tariffs: more supportive trends for global investors
Besides the tariff “noise” coming from the USA, other trends have provided a boost that has been helpful so far for global equity investors.  The Trump administration's foreign policy has highlighted the need for European rearmament, with the UK and EU increasing planned defence spending, and Germany's recent elections potentially leading to significant fiscal and defence policy changes that could boost economic growth. See more on this in last week’s market commentary titled “Making Europe great again”.
  

What would it take for us to change our strategic outlook?
There are three key areas we are monitoring which could cause a change in our outlook (and hence you could expect a change in our strategic asset allocation):

•    Meaningful evidence that our central outlook of strong growth and central bank easing is no longer appropriate
•    Implications of German stimulus (if it is passed into law) on our outlook for European equities
•    A material increases in tariffs (either in breadth, size, or persistence) relative to what has been incorporated in our forecasts


The importance of diversification
When designing portfolios, we’re aiming for them to be able to withstand different market conditions, including short-term falls in specific asset classes like we have seen so far this year. To do this we build diversified portfolios across different geographies, sectors and return drivers, so our returns aren’t overly reliant on one region or asset class. We expect to change our strategic asset allocation (at asset class level e.g. US equities) when there are significant changes in our outlook for a region or asset class. 


Market timing and the value of patient investing 
When investing in equities, corrections are inevitable, and market timing can be challenging, even for the most experienced professional investors.  In times of market volatility, and with daily news headlines it is important to remember that timing the market is challenging and can lead to missed growth opportunities. The old adage “time in the market, not timing the market” comes to mind.  In most cases, history suggests that staying invested in times of uncertainty pays off - see related article on why it ultimately pays to be a “patient investor”. 

For example, despite the unforeseen challenges brought by the COVID-19 pandemic, the global equity markets surged by 16.5% in 2020—a growth few would have accurately predicted early in the year. 

In our view, investors who are emotionally prepared for market volatility and maintain a long-term perspective while managing short-term risks gain a competitive edge.


Navigating Market Volatility with Confidence 
We understand that recent market movements may be causing some questions and discomfort. Periods of market turmoil are a natural part of investing, and while short-term volatility can feel unsettling, it’s important to remain focused on the long-term financial goals.

Our financial planning approach is designed to help our clients weather these fluctuations. Their financial plan and portfolios are built with diversification and resilience in mind, tailored to their personal objectives and time horizon. We advise our clients to not react to short-term movements which can often lead to decisions that may not align with their long-term strategy.

If our clients have any concerns or would like to discuss their portfolio in more detail, their financial planners are here to support. We encourage them to reach out—we’re committed to helping you stay on track and navigate market changes with confidence.
 

The Noise

• US Inflation fell to 2.8% in February, from 3% in January, and came in below market expectations of 2.9%. Inflation accelerated for food, with egg prices being one of the main inflation drivers, rising by 10% month on month and 59% year on year for February (Egglfation!). The chair of the Federal Reserve (Fed) Jerome Powell suggested that he expected the central bank to hold interest rates at their current range of between 4.25% and 4.5% at its meeting next week. Markets are now pricing in two rate cuts in 2025 with a roughly 85% chance of a third, slightly increased from before the data release. Looking forward, some economists are concerned that Trump’s trade tariffs could fuel inflation as the cost of metals like aluminium are climbing following the administration’s new hefty import duties.

• The Canadian central bank cut interest rates by 0.25% this week, to an absolute level of 2.75%. This is the lowest level since 2022, though Canada is facing upwards inflationary pressures, from tariffs to a weaker Canadian dollar. With Trump’s newly implemented 25% trade tariffs, a trade war with the US will probably slow the pace of Canadian economic growth and a weaker Canadian dollar will only add to the costs of importing goods. The Bank of Canada (BoC) warned that “monetary policy cannot offset the impacts of a trade war”. This all comes as their Prime Minister Justin Trudeau steps down, and Canada now face a general election before this coming October. 

• Chancellor Rachel Reeves is facing increasing fiscal pressure following the UK Budget. Rising bond yields have ticked upwards, the economy has seen stagnant growth, and higher than expected borrowing weigh on the UK’s economic outlook. Investors warn that her upcoming Spring budget will require significant spending cuts to reassure markets. The Office for Budget Responsibility (OBR) based its forecasts on borrowing costs before the recent rise in gilt yields, meaning the true fiscal challenge may be even greater. Analysts suggest Reeves could miss her key fiscal target by at least £1.6bn. As borrowing costs continue to climb, driven by global economic factors, pressure is mounting for Reeves to implement deeper cuts to stabilise public finances and maintain investor confidence in the government’s economic strategy.

The Numbers

GBP Performance to 13/03/2025

Source: Bloomberg, data as at 13/03/2025

The Niche

A fun financial Markets fact

The word "money" can etymologically be traced back to the Latin word "moneta." This name was given to Juno, the Roman goddess of marriage and queen of the gods. Many temples built in her honour doubled as mints, where coins were crafted, linking her name to currency.